No doubt that, in most cases, the Luxembourgish tax administration requests the references to databases to check that the interest rates applied can be comparable to those applied by independent companies during the same period.
However, the audit of a financing structure by the tax administration is usually more sophisticated.
The following elements, among others, may also be key points of discussions during the tax audit:
- The substance of the Luxembourgish entity
The tax administration focuses on the effective role of the Luxembourgish management and goes as far as requesting interviews with the persons involved. They insist on having involved and qualified management.
- The limitation of the deductible interests
Depending on the amounts at stake and the situation of the company, the deductible interests may be reduced according to the European tax rules transposed in Luxembourg ( ATAD I and II) or the so-called ” recapture expenses” rule if the company has a holding part.
- The “debt-equity ratio”, i. e. the ratio between the debts toward its shareholder and its total equity.
A ratio of 85/15 is usually applied by the Tax administration to ensure that the part of the debt in the financing of a holding company is reasonable.
- The capacity of the borrower to reimburse the loan
According to the last European Guidelines issued in 2020, the borrower should be able to reimburse its loan in a reasonable time. If not, the loan is requalified as equity, and the interests incurred are not deductible. We can help the company to draft appropriate cash-flow forecasts to provide an efficient answer to this kind of request.
In a nutshell, the analysis of a financial structure, prior to an audit, should not be limited to the confirmation of the interest rates of the debts and the receivables in Luxembourg!
If you feel like discussing this subject any further, let’s schedule a Teams coffee pause – or +352 621 81 73 35.
